Despite the hardship and pains of Nigerians occasioned by the various reforms of the federal government, the World Bank said the policies were necessary for the country’s economic growth and development.
According to Nigeria Development Update (NDU), a biannual report series by the World Bank released in December, titled “Turning the Corner: From reform and renewed hopes”, four major reforms have been initiated since President Bola Ahmed Tinubu assumed office in May.
These policies are: fuel subsidy removal, liberalisation of foreign exchange market, removal of 43 items from the foreign exchange (FX) restrictions and starting the tightening of monetary policy. These reforms have far reaching consequences on the economy and lives of Nigerians if properly implemented, according to the Bretton Woods institution.
Why the removal of fuel subsidy?
The fuel subsidy regime, according to analysts, has plunged the country into economic crises, leading to its removal in May, 2023. This was one of the profound moves made by the president on the day of his inauguration, declaring an end to the long existing fuel subsidy which cost the government about N300 to N 400 billion per month thereby increasing debt.
Prior to the removal of the subsidy, petrol subsidised in Nigeria was smuggled across the border, meaning that Nigerians were subsidising petrol for neighbouring countries. Within Nigeria, this subsidy was mostly going to those who used more petrol, and not to poorer Nigerians, according to the World Bank report.
As soon as the subsidy was removed, the price of petrol jumped up, resulting in a hike in transport fare as well as cost of living. The average retail price paid by consumers for Premium Motor Spirit (petrol) in May 2023 was N238.11 per litre; it stood at N648.93 as of November, according to the National Bureau of Statistics (NBS).
Though the reform has toughened the livelihood of many Nigerians, its long-term effects, if the government works with sincerity of purpose, will shape the economic landscape of the country.
The World Bank estimates that N2 trillion could be saved in 2023 from the removal of the subsidy, about 0.9 percent of GDP. Additionally, between 2023 and 2025, the expected gains are over N11 trillion, a great gain for the economy.
Why liberalise the foreign exchange market?
Also, to further revamp the economy from its regression state, the Central Bank of Nigeria (CBN), in June 14, 2023 unified the multiple official foreign exchange (FX) windows and committed to a willing-buyer-willing-seller principle in the Nigerian Foreign Exchange Market (NAFEM).
The unified exchange rate is expected to create a more stable economic environment; attract foreign direct investment (FDI), reduce uncertainties for businesses and drive economic growth and development.
The changes to operations in Nigeria’s FX market implies that the country has eased its control of the naira, allowing the local currency to freely float.
A free-floating exchange rate occurs when the government allows the exchange rate to be determined purely by market forces and there is no attempt to ask the central bank to influence the external value of the exchange rate.
What led to the removal of 43 items from the foreign exchange (FX) restrictions?
On June 23, 2015, the CBN issued a circular which put 41 product categories on a list of items not valid for forex in the Nigerian Foreign Exchange market. Two more product categories were added in subsequent years, limiting the total of imported product categories from accessing FX to 43, according to a BusinessDay report.
These items include: Rice, Cement, Margarine, Palm kernel, Palm oil products, Vegetable oils, Meat and processed meat products, Vegetables and processed vegetable products; Poultry and processed poultry products; Tinned fish in sauce (Geisha)/sardine; Cold rolled steel sheets; Galvanised steel sheets; Wheelbarrows; Head pans; Metal boxes and containers; Enamelware; Steel drums; Steel pipes, Wire rods (deformed and not deformed); Iron rods; Reinforcing bars; Wire mesh; Steel nails; Security and razor fencing and poles; Wood particle boards and panels; Wood fibre boards and panels; Plywood boards and panels; Wooden doors; Toothpicks; Glass and glassware; Kitchen utensils, Tableware; Tiles-vitrified and ceramic; Gas cylinders; Woven fabrics; Clothes; Plastic and rubber products; Polypropylene granules; Cellophane wrappers and bags; Soap and cosmetics; Tomatoes/tomato pastes, and Eurobond/foreign currency bond/share purchases.
The restriction, aimed at reducing foreign exchange demand for products that could be locally produced, improved employment generation and conserved foreign reserves.
However, the restrictions pushed importers into the parallel market, contributing to the surplus demand for forex. This weakened the parallel-market exchange rate, pushing up prices.
Removing these restrictions eliminate the need for importers of these products to go to the parallel market, reducing the pressure on the naira.
According to the World Bank report, when import restrictions are lifted, prices could fall by 4.7%, helping 1.3 million people, around 0.6% of the population out of poverty and making life more livable and affordable.
Additionally, the removal of the 43 items from the foreign exchange (FX) restrictions according to the report, is expected to help reduce prices on staples such as rice, poverty rates coming down, spur competition by removing exchange rate access distortions, and raising revenues for the government.
Why tight monetary policy?
In a bid to abate inflation and put the economy on the right pedestal, the CBN is expected to start tightening monetary policy.
Tight monetary policy, according to a BusinessDay report, is a set of measures taken by a country’s central bank to slow down the growth of money supply and reduce inflation. Such measures include raising interest rates, increasing cash reserve requirements, and selling government bonds.
According to the World Bank, “money supply grew by 34.6 percent to reach 27.5 percent of GDP in September 2023, the highest in over a decade.”
Monetary policy transmission is still hindered by the CBN’s development finance schemes and central-bank financing of fiscal deficits through Ways and Means, according to the report.
Are the reforms the reasons for inflation?
The removal of the fuel subsidy in May, 2023, saw inflation quickened to an 18-year high of 28.2% in November from 22.4% in May, according to the National Bureau of Statistics (NBS).
In the same token, naira depreciated significantly as a result of the liberalisation of the foreign exchange. According to the Financial Derivative Company Ltd., a dollar, which was N422 before the announcement, moved to N589 on June 24, N770.88 in July, N783.17 in November, and N764.5 as of Tuesday, 26th December, 2023.
The depreciation of the naira led to FX losses and gains for businesses and caused a surge in import costs, leading to inflationary pressures.
According to the World Bank report, “rising inflation has increased poverty from 40 percent in 2018 to 46 percent in 2023, pushing an additional 24 million people below the national poverty line.”
The report showed that the number of poor rose from 79 million in 2018 to 104 million in 2023, with urban poor—more exposed to inflation—increasing from 13 to 20 million. Meanwhile, poor people in rural areas increased from 67 to 84 million.
“The recent reforms are expected to undo the increases in poverty seen in recent years from 2024 onward, albeit only marginally and slowly,” the report said.
Is the government taking measures to curb rising inflation?
The government is making frantic effort to douse the spike in prices occasioned by the rising inflation.
Some of the measures, according to the report, are the further tightening of monetary policy; reduction of government expenses and raising its revenues so as to prevent further borrowing from the central bank.
The report noted that “inflation will gradually decline in 2024 and beyond, if monetary policy tightening is accelerated.”
Will the reforms be beneficial to Nigerians moving forward?
The removal of petrol subsidy has saved the government from subsidising fuel for other countries, directing the money to cater for the poor.
According to the report, targeted cash transfers were made available to the poor and vulnerable people (between October to December) to help cushion the adjustment to higher fuel prices.
It further revealed that N25,000 (about US$32) per month is to be transferred to each of the vulnerable people, resulting in 15 million recipients and their families (directly benefiting over 67 million Nigerians) through the state social register for three months.
The total costs of these transfers to provide relief to Nigerians are similar to what Nigeria was previously spending every three months on the subsidy, according to the World Bank.
What could be done to boost the economy moving forward in 2024?
Despite the rolled out reforms by the federal government, more still needs to be done to boost the “sluggish” economy.
The report highlighted that there must be detailed plans by the government to improve power, transport, infrastructure, public service delivery, security, and business environment.
In addition to the aforementioned, the report indicated that to come out of the economic crisis, there must be reduction in trade restrictions; review of tariffs to reduce costs of key inputs for producers; simplify and harmonise import and export procedures and address bottlenecks such as ports, logistics and congestion.